Texas Supreme Court Upholds State's Business Tax

DALLAS — The Texas Supreme Court determined Monday that the state’s main business tax does not violate the constitutional prohibition against enacting a personal income tax without voter consent.

An insurance adjustment firm in Boerne filed the case in the summer, contending that the franchise tax was, in effect, an income tax for business partnerships such as law firms and medical practices.

Allcat Claims Service LP was seeking to recoup money it paid under the tax law.

Seven of the court’s nine justices rejected the personal income tax argument and held that the tax affected limited partnerships as a business rather than the individual partners.

The two dissenting justices said the case should be heard at the district court level rather than by the Supreme Court. The legislation stipulates that any challenge to the tax must be filed with the Supreme Court and heard within 120 days, but Justices Don Willett and Debra Lehrmann said the court should have rejected that process.

“Fast-forwarding and vacuum-packing a multibillion-dollar challenge to a major piece of the Texas tax system does a great disservice not only to the parties involved, but also to the wider public that deserves methodically researched and reasoned Supreme Court rulings to guide their actions,” Willett said.

Allcat also argued that the law was not applied equally and uniformly, but the justices said they did not have the jurisdiction to decide that point and returned it to the district court.

The franchise tax, also known as the margins tax, was developed from an existing tax by the Legislature in 2006 after the state’s high court ruled that the school funding system was unconstitutional. The changes expanded the number of businesses subject to the tax.

The additional revenues from the tax were to have replaced the local property tax revenue lost by school districts from legislatively mandated tax-rate reductions, but it has never achieved the expected level of collections.

Leaders in the state Legislature made reforming the tax a priority for the 2013 session.

The original revenue projections for the fiscal 2008-2009 biennium were $12 billion, but collections actually were less than $9 billion and fell to $7.9 billion in the 2010-2011 budget cycle.

Comptroller Susan Combs’ official revenue projection for the fiscal 2012-2013 budget is $8.8 billion, an increase of 11.3%.

The state’s largest revenue source is sales tax. It generated $39.8 billion in 2010-2011 and is expected to total $42.9 billion in 2012-2013.

In arguments before the court in September, an attorney for the state said a ruling striking down the tax “would obviously send the Legislature back into a special session.”

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